Jordan Wealth Management Group - ScotiaMcLeod Truro

So is this a replay of 2008?

Today (and this year so far) has been tough to be an equity investor. I have had more than one client say to me of late, "yes, I can take another decline, I know the markets always come back, but I don't know if I can take another 2008".

I do not believe this correction will be a repeat. Market moves have never mirrored the immediate past moves, and the reasons are always different; so why should this time be different? That being said, I will remind you that it is, and always will be about confidence, or lack thereof. Do you have confidence that your power or phone company etc will still be here a few years from now gouging you for the benefit of their shareholders? I do. Others may not if they are talking about what the price of a barrel of oil will cost next year and what will be the profits of the related oil companies in that business. That's what makes a market - no one truely knows for sure, so you invest where you are comfortable.

I am providing a synopsis of some personal and corporate viewpoints for you to consider as we go through the next few weeks/months:

Positive

•        Don’t be surprised to see China appear as the buyer of last resort of European debt – with their vast currency reserves and current account surplus, it is in their best interests to have an alternative to just the US dollar as a place to invest.

•        Most of the positive factors which supported equity prices during the rally between August, 2010 and this past April are still relevant, if not more relevant today as evidenced by another solid quarterly earnings season. 

•        Equities appear attractively priced in the context of still increasing profitability, cash-rich corporate balance sheets, growing dividends, and continued emerging market strength which should continue to support demand growth for commodities. 

•        Equities have been trading within a range-bound market over the past two years, and with the recent sell-off, we believe we are near the bottom end of that range.

•       Current weakening global economic conditions and geopolitical circumstances suggest interest rates will remain lower for longer.  Expectations for rate increases by the Bank of Canada and the U.S. Federal Reserve continue to be pushed out into 2012.  Low interest rates are supportive for equities.

•        Beyond an inevitable relief rally in equities, the catalyst for a more sustained rebound in equities is not clear; however, we have felt for some time that the Fed would not likely remain idle indefinitely and that further stimulative monetary policy action is to be expected.  QE3 is a real possibility.

•        Heading into a U.S. election cycle, political bias suggests further fiscal and monetary policy stimulus in the near term; indeed, President Obama discussed infrastructure stimulus measures in his first speech following the signing of legislation to increase the debt-ceiling.

•        Longer term, you want to own anything China needs to import. Themes will be agriculture, energy, water (China’s water table dropping 3 meters a year). This will be good for Canada’s exports.

•        The current decline in stock prices represents a buying opportunity for equity investors who can look out a few years or more.

Negative

•        Equity market sentiment has deteriorated over the past two weeks, and the downward spiral accelerated with the recent conclusion of the U.S. debt-ceiling controversy as investors re-focused their attention on other global economic factors.

•        Renewed concerns regarding euro-zone sovereign debt, (Italy is the flavour of this week), are also weighing on capital markets with Spanish and Italian 10-year bond yields trading above 6%.

•        The risk of a credit rating downgrade of U.S. debt is very real, but may already be mostly reflected in equity market valuations.

•        Markets are working through an adjustment phase to reflect a somewhat lower economic growth outlook.  Unfortunately, any valid solution to the debt and deficit problems faced by Europe and the U.S. will be a further drag on growth for an extended period.  In the U.S., jobs and housing data are expected to remain weak for several years.

•        China will be a big swing vote as to the future health of our economies and markets – they are slowing down growth while trying to contain inflation but still keep their populace working and reasonably content. They are using some pretty aggressive/creative and possibly corrupt reporting to backstop loans and growth and this could be a big issue down the road.

Neutral

•        Trading volumes have increased over the last several days and the sell-off has been exacerbated by on-stop orders, margin calls, and other program trades. While we have yet to see true market capitulation (and we may not), we believe that the potential market return is beginning to modestly outweigh the risks at current levels.

•       Our outlook is tempered somewhat by recent economic releases indicating the second half rebound might be more muted than previously thought, (although we should still see some rebound in economic activity from the temporary slow down caused by the Japan earthquake earlier this year); however, our intermediate and longer term bias still favours equities over all other asset classes.

•         Although share prices may remain range bound for several months, investors in diversified portfolios should be looking to selectively add equity exposure.  In addition to commodity cyclicals that are expected to outperform in the event the economic outlook improves in the second half of 2011, investors should also add to defensive, dividend paying stocks to counter ongoing equity volatility and enhance total returns.

Please call me at 896-7740 if you want to discuss what to do for your individual circumstances. All the best, Ted
 

Since the last time I wrote, the market finally decided that it should pay attention to Greece. A good excuse for the markets to sell off and they did. Now the concern is Greece and contagion – anyone with any sense knows that Greece cannot afford to pay off their debts, and they do not have a large enough or diverse enough economy to grow themselves out the problem. It is in Germany and France’s best interest that this does not happen now, and that by the time they do, that everyone has heard and seen this coming for so long that when it happens; it is not considered the start of worse to come by way of belief that Greece’s default then means that Portugal, Ireland, and then Spain and even Italy also default. If everyone panics and sells, then the downward spiral starts again. Please do remember though that as in aviation terms – a spiral can be arrested by applying the appropriate offsetting control inputs. The difference with capital markets, is not everyone is sure of what intervention actually works. But I promise you efforts are and will continue to be made.

This all reminds me that markets are all about confidence – the reason I invest and either lend money to the Government of Canada (buy their bonds), or buy GIC’s issued by a bank, or invest in the shares of a company like Bell Canada is that I have some level of confidence that they will have the ability and morality to honour their commitments to me. I do have faith by and large that this is the case; I also know that there are in effect always a few who either by accident, stupidity or on purpose prove otherwise – thus the wise old adage to diversify; don’t put all your eggs in just one basket. I also believe by and large that the core of any investment strategy should include ownership in good companies that you are content to be an owner of over a long time – just as the business owner down the street does not sell his business outright in May and go away until the fall when he buys it back.

US manufacturing is benefiting from the weak US$. Expectations are that the US economy will pick up some steam in the fall when there is a rebound from the slowdown caused by the supply chain disruptions caused by the disaster in Japan. (Funny how the market is focused on the positive from all this – when not long ago; this was the reason markets were down sharply). Oil prices are below $100 again, and that is a good thing – oil companies still profitable, but leaves more money on the table to buy other goods. US housing prices are still going nowhere and could decline another ten percent – but the wealth effect from this lower level is not as significant as before. In terms of concerns the US is another Greece – the similarity stops at the knowledge that both countries carry a lot of debt. The US is a way more diverse and adaptive economy, and painful though it will be; they have the capacity (expect it to start after the next US election November 2012) to absorb the majority of the tax increases and spending cuts necessary to get their debts under control over the next decade; just as Canada was forced to in the 90’s.

Where China goes, so do we for a while longer. China remains the real engine of growth for now, and while they are trying to slow down their economy to control inflation and speculation, they continue to have a restive population that needs to continue to be pacified by job creation in infrastructure – they can commission the construction of new roads, airports and cities very quickly if needed to stimulate growth. In the meantime, Chinese consumerism just starting, they love their luxury goods and there are only 300 million out of 1.3 billion in China that have raised themselves to middle class status. As I explained to my children many years ago; we will all have to drive smaller cars because there are a bunch of Chinese and Indians who want cars too!

So, bottom line for now: don’t panic, be realistic, remember that we adapt to circumstances and fix things that break; or build a better model!

Please feel free to call or email me if you have any questions or concerns about your individual portfolio. Ted